(Updated 2025) It can be scary to be on the board of directors for a nonprofit these days. Many people on nonprofit boards are worried about being sued and having to pay for things, especially since the rules and risks change every year.
One wrong move or simple mistake could lead to a lawsuit for conflicts of interest, breach of fiduciary duties, or negligent oversight.
Laws like the Business Judgment Rule and the federal Volunteer Protection Act protect directors and officers from some legal action in Arizona and other states. Not all actions, though, are completely safe.
Our blog talks about how d&o insurance works with state laws to make it safer for people who work for nonprofits. You’ll learn how to follow the law, pick the right liability insurance, and how your articles of incorporation can protect you as a director or officer.
Important Points
- There are more lawsuits against nonprofit directors and officers now. Arizona law and the federal Volunteer Protection Act (1997) both give some protection, but not for gross negligence or crimes.
- If board members get sued, D&O insurance can help pay for legal fees. Nonprofits need to read the terms of each policy carefully and talk to an expert about their options.
- Arizona laws protect volunteers who don’t get paid and do their best. State law does not give this immunity to paid directors.
- The Business Judgment Rule says that courts assume directors are doing the right thing unless there is strong evidence that they did something wrong, like acting for their own gain or not caring about their duties.
- Indemnification or insurance doesn’t cover all risks. Most of the time, losses from illegal acts, self-dealing, or gross negligence aren’t covered. To know what you can and can’t do, always look at your bylaws and policies.
Increased Risks of Liability for Nonprofit Officers and Directors
Once you know the basics, it’s clear that nonprofit directors and officers are at greater risk now than ever before. In the last ten years, there have been a lot more cases against board members of nonprofits.
In the past, lawsuits mostly focused on businesses that made money. More claims are also being made against nonprofit organizations today.
If directors and officers are guilty of gross negligence or breaking their fiduciary duties, they can be held personally liable. These leaders are being watched more closely by the courts. Every year, the rules for nonprofits get stricter, which raises the stakes for standards of conduct and duty of care.
As liability grows, insurance companies change their policies. This often makes d&o insurance premiums go up for nonprofits that are trying to manage risk responsibly.
Using the Business Judgment Rule
The Business Judgment Rule gives Arizona nonprofit board members a lot of protection. Directors meet their fiduciary duties when they act in good faith, take care, and look out for the best interests of their nonprofit organization.
The law says that these leaders should act like smart people would in the same situation. Arizona law says that courts should assume that directors are doing their jobs as long as no one can prove that they aren’t.
A person who disagrees with a director’s decision has to prove a lot. There must be clear and convincing proof that there was gross negligence or a careless disregard for duty.
For instance, if a nonprofit board does its homework before making decisions about contracts or risk management, courts usually protect them under this rule. This protects against personal liability unless someone can show wrongdoing that goes beyond simple mistakes. This keeps nonprofit compliance fair and lets boards focus on the safety and goals of public charities.
What the Federal Volunteer Protection Act does to protect you
The Federal Volunteer Protection Act (VPA), which was passed in 1997, protects volunteers who work for nonprofits and government groups from being sued. This law applies to people who don’t get paid, except for reasonable costs or up to $500 a year.
Volunteers must do their jobs and have any licenses or certificates they need.
Immunity does not shield individuals from gross negligence, willful or reckless conduct, criminal activities, or injuries resulting from operating vehicles that require a license. The VPA takes precedence over state laws, unless state law offers greater protection for volunteers.
The VPA is one of many ways that directors, officers, and board members can protect themselves from personal liability while they are in office.
Arizona’s Volunteer Protection Statute Coverage
Arizona’s Volunteer Protection Statute, along with federal law, protects volunteers in nonprofit organizations in specific ways. Arizona Revised Statutes A.R.S. 12-982 says that unpaid board members, trustees, and direct service volunteers are not liable for civil damages if they do their jobs honestly and follow the rules.
This law only applies to things that the volunteer does as part of their job. It doesn’t protect against willful wrongdoing or gross negligence. Paid directors and officers are not protected by this law; only those who work for free are, except for reasonable expense reimbursement.
Before a claim can be made against a charity organization based on a volunteer’s actions, the plaintiffs must show that the act was part of the volunteer’s nonprofit duties.
This protects many leaders of nonprofit corporations while still requiring them to follow basic legal duties like duty of care and avoiding conflicts of interest.
Looking into the indemnification rights of directors and officers
The Arizona Nonprofit Corporation Act protects nonprofit board members very well. Most well-written bylaws say that the nonprofit must protect its directors and officers as much as state law allows.
This means that board members who act in good faith, think their actions are good for the organization, and follow their fiduciary duties, like duty of care or duty of loyalty, can usually get help paying for legal defense costs.
If a court finds that a director harmed the company or took an unfair advantage, they can’t get paid back. In some cases, Arizona law also lets nonprofits pay for claim costs ahead of time.
But this could be self-dealing, which is against Internal Revenue Code Section 4941(a). Directors and officers insurance (D&O insurance) is an example of insurance coverage that gives you extra protection because relying only on indemnification may not cover all risks.
Before making decisions about indemnity rights for nonprofit directors, always look at both your company’s bylaws and the laws of your state.
Looking at Directors and Officers Insurance Policies
Directors and officers insurance, or D&O insurance, protects the personal assets of nonprofit directors and officers. This kind of insurance is legal for nonprofits to buy for their board members in Arizona.
Each policy usually covers two things. First, it can pay back the nonprofit when it protects a director or officer. Second, it gives the director or officer money directly if the company can’t pay them.
No two D&O policies are the same. The terms vary by insurance company, so it’s important to read the fine print. Policies don’t cover the whole nonprofit’s debts; only general liability policies do that.
Some plans even cover extra benefit penalties for public charities and social welfare organizations, but these plans may cost more. Prices for policies vary a lot from one organization to the next. Nonprofits need to compare prices with an experienced agent to manage their risks.
Directors’ Dependence on Information Given
After looking into directors and officers insurance, it’s helpful to see how board members of nonprofits use information to make decisions every day. Nonprofit directors can trust reports or advice from employees and officers they think are trustworthy.
They also often ask lawyers or public accountants for their expert opinions.
If the director isn’t a member of the committee and trusts the group, nonprofit boards may also trust the work that those committees do. But this trust has to be real; a director can’t ignore facts that show the information is wrong or misleading.
Under Arizona law and the laws of other states, good faith is important. This rule protects people who do their duty of care, but it also makes them responsible if they act with gross negligence or know better than to trust bad data.
Directors in Arizona Can Rely on Good Faith
Directors usually believe what other people tell them. Arizona law gives more protection in this case. This state makes it easy to assume that nonprofit board members act in good faith and fulfill their fiduciary duties, such as duty of care and loyalty.
If someone says these directors did something wrong, they need to show clear and convincing proof to break this shield.
This rule protects board members from unfair attacks unless there is strong evidence of gross negligence or a conflict of interest. Arizona courts use this standard to back up director decisions unless there are real, solid facts that show otherwise. For example, if a director does something for their own benefit instead of helping the nonprofit organization.
The law protects volunteer leaders who make honest choices while working for tax-exempt groups, as long as they follow the rules set out in articles of incorporation or other important documents.
Nonprofit Indemnification: Limits and Provisions
Many board members are safe because they act in good faith, but nonprofit indemnification has strict limits. If a court finds that a director is responsible for the corporation or guilty of giving themselves an unfair advantage, Arizona law says that the nonprofit organization cannot pay for their loss.
Some losses, like fiduciaries being very careless, are never covered by public policy or certain laws.
In some cases, advance claim expenses may be okay, but they could be seen as self-dealing under Internal Revenue Code Section 4941(a), which could put tax-exempt status at risk. Even if the articles of incorporation have a strong indemnity clause, not having enough money or going bankrupt could stop payment for legal fees or losses.
When indemnification doesn’t work, like in personal liability claims, a directors and officers insurance policy is very important for managing risk and keeping nonprofit board members safe.
Take a closer look at liability protection strategies
Smart boards of directors use a lot of risk management tools to protect nonprofit board members from being personally liable. Directors and officers insurance, strict rules against conflicts of interest, and careful legal compliance all help protect nonprofit groups and the people who run them from making expensive mistakes.
What Directors and Officers Insurance Doesn’t Cover
D&O insurance, or directors and officers insurance, protects board members of nonprofits from a lot of claims. However, there are significant exclusions in the policy that restrict its coverage. Most policies, for instance, don’t cover damages caused by pollution or breaking ERISA laws.
They also don’t cover damage to property or injury to people; for those risks, you’ll need a general liability policy.
Libel or slander, discrimination claims, antitrust problems, and making money illegally are some of the most common gaps. Also, violations of securities law are not included. If a court finds that an officer or director was dishonest or committed fraud, the insurance company will not pay the costs.
These policies also don’t cover claims between directors. Coverage may stop for joint projects with outside partners, federal actions like Form 990 issues from agencies, contract disputes such as employment issues, malpractice claims, and not maintaining other necessary insurance.
Nonprofits should talk to a knowledgeable insurance agent about their D&O policy to make sure they know what is and isn’t covered by their risk management plans.
Looking at the different types of directors and officers insurance
There isn’t a standard form for directors and officers insurance, or D&O insurance. Different policies have different terms and exclusions. Some policies cover more than others. For instance, some insurance companies will cover the extra benefit penalties that board members of public charities or social welfare groups have to pay.
These extra features cost more, but they help protect you from personal liability risks.
The price can be very different from one non-profit to the next. It’s important to look at a few different D&O insurance policies to find the one that meets your nonprofit’s risk management needs and budget.
Check to see if the coverage includes things like claims about employment practices, third-party liability, cyberthreats, conflicts of interest, and vicarious liability, which are all problems that nonprofit organizations face a lot these days.
Don’t think that homeowners’ insurance or commercial general liability will cover these gaps. D&O policies cover specific risks that come with being on a nonprofit board, like the duty of care or loyalty.
How State Laws Affect the Liabilities of Directors and Officers
State laws make it clear when nonprofit directors and officers are personally responsible. Arizona, like all states, has its own rules on who gets volunteer immunity and what actions are protected.
If board members do their jobs honestly, certain laws in Arizona protect them from some lawsuits. The Volunteer Protection Act (VPA) takes precedence over any state law that offers less protection, but states can offer more if they want to.
Arizona holds nonprofits responsible for their volunteers in a way that is similar to how employers are responsible for their employees. State protections may not apply if a board member is very careless or acts outside their job description. In those cases, personal risk goes up quickly.
Look over your articles of incorporation and bylaws very carefully, as they often show how state rules fit with the needs of nonprofits.
In conclusion
There are real legal risks for nonprofit board members, but there are clear steps they can take to stay safe. Following the business judgment rule, knowing about protections like Arizona’s Volunteer Protection Statute and the Federal Volunteer Protection Act, and having D&O insurance are all very important.
These tools are easy to use and help directors and officers manage risk much more easily. Following good governance practices gives your nonprofit peace of mind, helps you meet your fiduciary duties, and keeps you from being personally liable.
If you need more help or legal advice about compliance or insurance options, you might want to talk to a lawyer who specializes in charitable organizations. Taking action now will protect you better in the future.
Questions and Answers
1. What are the legal responsibilities of board members of nonprofits?
Directors of nonprofits have to follow the duty of care, the duty of loyalty, and the duty of obedience. These rules tell everyone on a nonprofit board what to do.
2. Can the heads of nonprofit organizations be held personally responsible?
Yes, directors and officers can be personally liable for damage to the nonprofit organization if they are grossly negligent or don’t do their fiduciary duties.
3. How does D&O insurance help protect boards of nonprofits?
Directors and officers insurance helps pay for legal fees if someone sues board members for making decisions in good faith while working for the organization.
4. Why is it important for a nonprofit to manage risks in order to stay in compliance?
Risk management helps nonprofits stay out of trouble with the law by making sure they follow the rules for articles of incorporation, deal with conflicts of interest, and follow the rules for hiring and firing.
5. What are the rules for how nonprofit directors and officers should act?
Board members should act like a smart person would in the same situation, which means making smart choices and putting the charity first at all times.
6. What does a conflict of interest mean for a nonprofit’s legal responsibility?
If conflicts of interest aren’t handled properly, they can lead to legal problems. Clear rules help everyone on the board follow the law, like the Uniform Prudent Management of Institutional Funds Act, and protect both the individual board members and the whole group from mistakes or claims.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.